March 28 (Bloomberg) -- Treasuries declined after five-year
notes attracted the lowest demand at an auction since August as
investors questioned whether the economy is faltering enough to
merit additional stimulus by the Federal Reserve.

The bid-to-cover ratio, which gauges demand by comparing
total bids with the amount of debt offered, was 2.85 at the $35
billion sale, down from a 10-auction average of 2.91 and the
least since it was 2.71 seven months ago. Fed Chairman Ben S.
Bernanke said yesterday economic recovery isn’t assured and
further easing is “on the table.”

“The recent rally was somewhat tired, and it showed at the
auction, given the relatively weak demand,” said Michael Pond,
co-head of interest-rate strategy in New York at Barclays Plc,
one of 21 primary dealers that are obliged to bid in U.S. debt
sales. “Investors weren’t as excited about the yield levels.”

The yield on the current five-year note rose two basis
points, or 0.02 percentage point, to 1.03 percent at 5:08 p.m.
in New York, according to Bloomberg Bond Trader prices. The
0.875 percent securities due in February 2017 declined 3/32, or
94 cents per $1,000 face amount, to 99 1/4.

Benchmark 10-year note yields increased two basis points to
2.20 percent after falling earlier to 2.16 percent, the lowest
level in two weeks, and rising to 2.22 percent.

Five-year notes have lost 0.7 percent in March, according
to a Bank of America Merrill Lynch indexes. Treasuries overall
have fallen 0.9 percent, the data show.

Rise in Yield

Today’s auction, the second of three U.S. note sales this
week totaling $99 billion, drew a yield of 1.040 percent. That
compared with a forecast of 1.042 percent in a Bloomberg News
survey of eight primary dealers and a 0.90 yield at the last
sale of the maturity on Feb. 22.

Indirect bidders, an investor class that includes foreign
central banks, purchased 41.9 percent of the notes, compared
with an average of 44 percent for the past 10 sales. Direct
bidders, non-primary dealer investors that place their bids
directly with the Treasury, bought 11.3 percent, versus an
average of 11.9 percent at the past 10 auctions.

“It was definitely weaker than we expected,” said Scott
Sherman, an interest-rate strategist in New York at the primary
dealer Credit Suisse Group AG. “It seemed like it might have
set up for a strong auction, but we didn’t get that.”

The sale followed an offering yesterday of $35 billion in
two-year debt that drew a yield of 0.34 percent and attracted
stronger-than-average demand. The bid-to-cover ratio was 3.69,
versus an average of 3.53 for the past 10 sales. The Treasury
will sell $29 billion of seven-year debt tomorrow.

Volatility Eases

Volatility eased for a sixth day. Bank of America Merrill
Lynch’s MOVE index, which measures Treasury price swings based
on options, fell to 77.4. It reached 93.3 on March 20, the
highest this year. The 10-year average is 102.7.

About $298 billion of Treasuries changed hands today
through ICAP Plc, the world’s largest interdealer broker,
compared with about $160 billion on March 26. The average daily
volume over the past year is about $267 billion.

Ten-year note yields touched a two-week low earlier as
investors sought safety and the Fed bought the biggest
percentage of Treasuries offered by dealers since January. It
purchased $4.81 billion of securities due from August 2020 to
November 2021, 42 percent of the amount offered to it.

The purchases are part of a program to replace $400 billion
in shorter-term debt in the Fed’s holdings with longer-term
Treasuries to cap borrowing rates.

Bernanke said unemployment remains too high and policy
makers don’t’ rule out any further options to boost growth.

‘Far Too Early’

“It’s far too early to declare victory,” the Fed chief
said after he was asked if another round of quantitative easing,
or large-scale bond purchases, remains a possibility, according
to a transcript of an interview with ABC News anchor Diane
Sawyer provided by the network. “We don’t take any options off
the table.”

The Fed bought $2.3 trillion of debt in two rounds of
quantitative easing from December 2008 to June 2011 to spur
growth. It has kept its benchmark interest rate at zero to 0-.25
percent since December 2008.

Pacific Investment Management Co.’s Bill Gross said the Fed
will probably shift focus to mortgage securities to keep
borrowing rates low when its so-called Operation Twist program
ends in June.

It will be a “twist on another twist going forward,”
Gross, who runs the world’s biggest bond fund, said from Pimco’s
headquarters in Newport Beach, California, during an interview
on Bloomberg Television’s “InBusiness with Margaret Brennan.”

Five-Year, Five-Year

Treasuries tumbled earlier this month after the Fed’s Open
Market Committee upgraded its assessment of the economy. The
U.S. jobless rate fell to 8.3 percent in February, the lowest
level in three years, the Labor Department said March 9. The
Institute for Supply Management’s factory index shows 31 months
of expansion.

The five-year, five-year forward break-even rate, which
projects the pace of consumer price increases starting in 2017,
declined last week to 2.72 percent. While the measure, which the
Fed prefers to look at in determining inflation expectations and
monetary policy, is up from this year’s low of 2.37 percent on
March 5, it’s in line with the average over the past decade.

The 10-year break-even rate, a gauge of the outlook for
consumer prices over the next decade derived from the yield
difference between 10-year notes and Treasury Inflation
Protected Securities, fell to 2.33 percentage points after
touching a seven-month high of 2.45 percentage points on March
20. The average over the past year is 2.19.

Quarterly Loss

Valuation measures show government debt has become more
expensive. The term premium, a model created by economists at
the Fed, was negative 0.45 percent today after reaching negative
0.26 percent on March 19, the least expensive since October. A
negative reading indicates investors are willing to accept
yields below what’s considered fair value.

Treasuries have lost 1.2 percent this year in what would be
their biggest quarterly decline since sliding 2.7 percent in the
last three months of 2010, according to Bank of America Merrill
Lynch indexes. The returned 9.8 percent in 2011, the data show.

German bunds have fallen 0.2 percent in 2012, while U.K.
gilts have dropped 2.2 percent and Australian sovereign debt has
lost 1 percent, Merrill indexes show.

The so-called forward 10-year U.S. interest-rate swap rate,
where traders see the 10-year interest-rate swap rate in 10
years’ time, rose to 3.7 percent, after reaching a 2012 high of
3.9 percent March 19. The cost to exchange fixed- for floating-rate payments in a decade has averaged 3.5 percent in 2012.

Credit-default swaps tied to Treasuries rose 0.6 basis
points to 30.7 basis points as of yesterday, after the
securities declined for five of the six previous days, according
to the data provider CMA. The cost to protect against U.S.
default compares with 72 basis points for Germany and 62 basis
points for the U.K.